Question

You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.90 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:Real risk-free rate = 0.85%
Default risk premium = 1.80%
Liquidity risk premium = 1.05%
Maturity risk premium = 2.40%

What is the inflation premium?What is the fair interest rate on Moore Corporation 30-year bonds?

Answer 1

Answer:

inflation premium is 1.05%  

fair interest rate is 7.15%

Explanation:

given data

currently earning = 1.90 percent

Real risk-free rate = 0.85%

Default risk premium = 1.80%

Liquidity risk premium = 1.05%

Maturity risk premium = 2.40%

solution

we get here Inflation Premium that is

Inflation Premium = (Current year bond rate - Real risk free rate)    .........1

Inflation Premium = 1.90 %-0.85%

Inflation Premium = 1.05%

and

now we get here fair interest as

Fair rate = Real interest rate + Default risk premium + liquidity risk premium + Maturity risk premium + inflation premium     ...............2

Fair rate = 0.85 % + 1.80% + 1.05% + 2.40% + 1.05%

Fair rate = 7.15%